March saw record outflows from U.S. ESG exchange-traded funds

U.S. investors pulled money out of ESG exchange-traded funds at the fastest rate on record this month, causing the exchange-traded funds to have one of their worst months to date.

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It has been reported that, as of March 27th, U.S.-listed ETFs that focus on environmental, social, and corporate governance considerations received a net withdrawal of $5.7 billion according to preliminary research by RBC Capital Markets. As a result of these withdrawals, the assets under management amounted to $81 billion, the largest monthly total in history.

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According to RBC, a large part of the slump is due to the loss of $3.9 billion in a single day in March for the iShares ESG Aware MSCI USA ESGU +0.22% ETF (ticker: ESGU), which could be attributed to BlackRock (BLK) rebalancing its model portfolios. In addition to market volatility and poor performance, RBC also emphasized the political backlash against environmental, social, and governance (ESG), factors contributing to the increase in regulatory scrutiny over misleading labels on investment funds that are not sustainable. 

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As for Europe, RBC said money was moving into sustainable funds with a much greater degree of resilience than in the US, and remained positive in March, but now remains far below the highs reached in 2021.

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There has been a growing backlash against ESG investing in the U.S. over the past year. ESG investing is just one aspect of the larger conservative “anti-woke” movement. A GOP proposal that prevents pension fund managers from taking into account environmental, social, and governance factors when making investment decisions has been vetoed by President Joe Biden for the first time in his presidential administration last month.

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It is reported by RBC that in the second half of 2022 there will be a number of funds launched promoting "anti-ESG" strategies. On the one hand, this is due to the political scrutiny that has been posed towards ESG over the last year and, on the other, it represents something along the lines of $729 million in assets under management. 

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In spite of that, we do not expect the political scrutiny of ESG and divestment to abate in the U.S. in the short run, but we are seeing some pushback at the state level in response to anti-ESG/divestment initiatives. 

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A letter that was sent to the state treasurer by the board of trustees of the County Employees Retirement System in Kentucky, for example, was approved by the board of trustees of that system. It was reported that RBC members decided not to divest from financial institutions that were deemed to be boycotting energy companies. They thought that this would be inconsistent with their fiduciary duty.

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The Wyoming House of Representatives Appropriation Committee recommended a "no" vote on two anti-ESG bills as well. In one of those plans, the state would only be permitted to invest in companies that engage in economic boycotts. It would also require managers investing state funds to take into account only "financial factors," which would eliminate the need to consider environmental, social and governance factors.

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